Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

July 2014

07/31/2014

Alison Frankel has a very insightful post about how the looking Argentine debt default illustrates the limits of US courts to manage sovereign debt litigation:

... the hedge fund litigation with Argentina has laid bare the limits on the power of U.S. courts, the borderline between litigation and foreign policy. Thanks to Argentina, bond investors are now on notice that they might not be able to enforce U.S. judgments against foreign sovereigns. They’ll have to factor that risk into investment decisions.

But at least investors know. U.S. courts fulfilled their duty. They heard all sides, rendered decisions and reconsidered those decisions on appeal. They laid down the law. They just can’t get Argentina to follow it.

If Argentina manages to successfully evade the US courts' orders to repay the bondholders in question, it could have a significant impact on the ability of all sovereign debtors to borrow. One thus continues to think it would be in the interest of sovereign borrowers to establish some sort of international regime akin to bankruptcy reorganizations. All of which takes me to one of my first law review articles, Comity and Sovereign Debt Litigation: A Bankruptcy Analogy. Maryland Journal of Int'l Law and Trade, Vol. 10, No. 1, 1986. Available at SSRN: http://ssrn.com/abstract=302009:

On repeated occasions in the post-war period, the cumulative effects of policy mistakes, recessions, inflation, and other economic problems have made it difficult for sovereign debtors to service their external debt. Unlike a domestic U.S. private debtor, who may resort to formal bankruptcy procedures in the event of insolvency, a defaulting sovereign debtor has no formal mechanism for triggering a restructuring of its debt.

In some cases, sovereign debtors have resorted to a moratorium on debt payments. This article argues that U.S. courts ought to give effect to such moratoria under the international law principle of comity. Using standard game theory methodology (the so-called "creditors dilemma" variant of the famous "prisoners dilemma"), the article argues that creditors of such debtors would agree in advance to give effect to such a moratorium provided it neither repudiated the sovereign's debts nor gave preference to certain creditors. A legal test for granting comity to sovereign debt moratoria is therefore proposed.

07/30/2014

The agency chapter of the Business Associations casebook I co-author with Bill Klein and Mark Ramseyer relies heavily on cases involving franchise relationships. Is the franchisee an agent of the franchisor? If the franchisee a servant or independent contractor of the franchisor? And so on.

The franchise cases can be problematic, because franchising is such a unique form of business relationship. As of this morning, however, I can't help wondering if the NLRB ruling that McDonald's and its franchisees can be treated as joint employers will affect the way we teach these cases?

McDonald's Corp. could be treated as a joint employer with its franchisees in labor complaints, according to a National Labor Relations Board legal determination that could have far-reaching implications for how restaurant companies deal with their workers.

The decision by the NLRB's general counsel, announced on Tuesday, came in response to complaints alleging that McDonald's and its franchisees violated the rights of employees involved in protests against the company.

McDonald's vowed to fight the decision, which business and labor groups both said could set a precedent for restaurants and retailers that rely on franchising. ...

Allowing companies to be treated as joint employers with their franchisees could crimp their ability to claim that they aren't responsible for the labor actions of those franchise partners, making companies like McDonald's more vulnerable to campaigns by labor groups for higher wages and improved conditions for restaurant and retail workers.

"This legal opinion would upend years of federal and state legal precedent and threaten the sanctity of hundreds of thousands of contracts between franchisees and franchisors," said Steve Caldeira, chief executive of the International Franchise Association, who called the decision "wrong and unjustified."

At the moment, the decision probably doesn't require Business Organization teachers to do anything. It may not hold up to court challenge. If it does hold up, it will initially be just a factor in NLRB cases. But might it not bleed over into employment law, especially employment discrimination? And might it eventually bleed into agency law?

07/29/2014

The Washington Free Beacon reports that Vice President Joseph Biden made his audience “burst into laughter” at the Urban League gathering in Cincinnati when he cracked “I should have had one Republican kid to go out and make money,” noting that instead he has a daughter who went into social work.

And well should they have burst into laughter. It was a joke, folks! In real life, Biden’s son Beau has worked as an asbestos plaintiff’s lawyer, which is much more of a moneymaking venture than most “Republican kids” ever get near. Both he and another Biden son have been closely associated with one of the biggest such law firms in the nation. This fits a pattern noted by David Boaz a few weeks back, in which reporters keep acting surprised when Democratic politicians are found to be pals with zillionaires and attending fundraisers at mansions.

One refrain you hear frequently from insurance companies, police, and the media is that 'speed …Read more

Here's the quote in full.

"I've spent eight years in traffic services, and I was a crash reconstructionist for five years before that," Michigan State Police Lieutenant Gary Megge told the News. "So I've seen my share of fatal wrecks, and I can tell you: Deaths are not caused by speeding. They're caused by drinking, drugs and inattentiveness. The old adage that speed kills just isn't realistic. The safest speed is the speed that is correct for that roadway at a given time. A lot of speed limits are set artificially low."

My friend Wharton professor Eric Orts has started a blog where he'll be focusing on topics falling into one (or more) of three "buckets":

Business Theory. This interest follows my general interest in asking foundational questions about the nature and purposes of business in our society today. My most recent contribution in this area is Business Persons: A Legal Theory of the Firm (Oxford University Press 2013). I am currently at work on a sequel accepted for publication and currently titled Rethinking the Firm: Business Theory from an Interdisciplinary Perspective. This book aims to combine philosophical, sociological, historical, economic, and political perspectives on the nature and purposes of firms.

Corporate Governance. This area has been my longest standing focus in my teaching and research. In various writings, I have discussed corporate law and securities regulation regarding the fiduciary duties of corporate directors and officers, the organizational complexity of firms, liability rules, capital structures, and insider trading. I serve also as the academic co-director (with Jill Fisch of Penn Law School) of theFINRA Institute at Wharton’s Certified Regulatory and Compliance Professional Program in executive education. Increasingly, business ethics is also a strong and related interest, and I have written constructive critiques of stakeholder theory (with co-author Alan Strudler) and currently serve on the editorial board of Business Ethics Quarterly.

Environmental Sustainability. Another area of long-standing interest has been environmental law and, more generally, the problem of the ethical and economic case for taking sustainability seriously in business and everyday life. In environmental law, I have focused on so-called “third generation” approaches to regulation that attempt to leverage indirect mechanisms such as environmental reporting and mandatory disclosure of information as methods to encourage and provide incentives for environmentally beneficial behavior in business. In a law review article in 1995, I coined the term “reflexive environmental law” to refer to this indirect regulatory method of encouraging business improve their sustainability. In addition, I have served as the founding faculty director of the Initiative for Global Environmental Leadership (IGEL) since 2007. IGEL is supported by an advisory board of companies concerned about sustainability issues in business and promotes a wide variety of teaching, research, and outreach activities. One signature event is an annual conference-workshop at which we assemble leading academics and practitioners to examine a carefully selected cutting-edge topic. Reports about IGEL’s conference activities are often published by Knowledge@Wharton. Outside of Wharton, I’m a founding board member of the Alliance for Research on Corporate Sustainability, which advances the cause of promoting rigorous research on business-and-sustainability topics in business schools and elsewhere.

The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship. This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2015 through June 2016 or June 2017). The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching. No degree will be offered as part of the Fellowship program. Only one fellowship will be offered.

Fellowship candidates must hold a JD degree from an ABA accredited law school and be committed to a career of law teaching and scholarship in the field of business law and policy. Applicants should have demonstrated an outstanding aptitude for independent legal research, preferably through research and/or writing as a law student or through exceptional legal experience after law school. Law Teaching Fellowship candidates must have strong academic records that will make them highly competitive for law teaching jobs.

The University of California is an Equal Opportunity/Affirmative Action Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national origin, disability, age or protected veteran status. For the complete University of California nondiscrimination and affirmative action policy see: UC Nondiscrimination & Affirmative Action Policy.

The University of California seeks candidates committed to the highest standards of scholarship and professional activities and to a campus climate that supports equality and diversity.

Just a reminder that: This blog is a personal, extracurricular activity. The blog is not affiliated in any way with the UCLA law school or university. The blog receives no support--financial or otherwise--from the UCLA law school or university.

The opinions expressed herein are mine alone and do not represent the opinions of the law school or university administration, faculty, students, or alumni. They should not be attributed thereto.

In a consolidation, two or more corporations combine to form a new corporation. In our earlier example, suppose Ajax and Acme decided to consolidate rather than merge. In that case, neither Ajax nor Acme would survive the consolidation. Instead, a new corporation (call it NewCo) would be formed and succeed to all the assets, rights, duties, liabilities and so on of both Ajax and Acme. The differences between the merger and the consolidation thus are purely form and semantics. They are effected in the same manner and have the same substantive results. as a result, in colloquial speech (even among sophisticated lawyers) the terms are often used interchangeably.

So here's my questions: When would you expect a client to prefer a consolidation to a merger, if ever? When would you advise a client to choose a consolidation over a merger, if ever?

07/25/2014

The Sarbanes-Oxley Act created a new obstruction of justice law that imposes stiff criminal penalties on anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under [the Bankruptcy Code].” Just how literally are we to take the term "tangible object, however? A new article discusses an upcoming Supreme Court case whose facts push that question to the outer limits:

Abstract: Occasionally the Supreme Court of the United States hears a case simply to correct an injustice. That happened in Yates v. United States. Yates, a fishing captain, threw back three undersized fish. He later was convicted of violating the Sarbanes-Oxley Act, a statute designed to prevent corporate fraud, on the ground that he destroyed a “record, document, or tangible object,” even though the fish could not remotely be deemed a financial record or an information storage device. The court of appeals upheld Yates’s conviction by relying entirely on a dictionary definition of the term “tangible object.” That literal-mindedness lead to an uncommonly silly result. The Supreme Court should not only reverse the judgment of conviction, but also underscore two canons of construction. First, courts should use common sense when interpreting criminal laws, rather than be slaves to the dictionary. Second, the Rule of Lenity is a “rule” of lenity, not just an “option” of lenity, and it is an especially important rule when a defendant faces a potentially severe sentence.

Larkin, Paul J., Oversized Frauds, Undersized Fish, and Deconstruction of the Sarbanes-Oxley Act (June 23, 2014). Georgetown Law Journal, Vol. 103, No. 17, 2014. Available at SSRN: http://ssrn.com/abstract=2460233. I can't wait to see how this one comes out.

Marcia Narine is a rising star in corporate law academia and the blawgosphere who I've been following with interest for some time. In her latest post at Business Law Professor Blog she poses the following questions as Dodd-Frank turns 4. So I thought I'd try my hand at offering some answers:

1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?

I'm not a macro economist, so I have no idea whether the economy will tank in the next year (but if forced to guess with a gun to my head, I'd say no). As for being behind, she is referring to the fact that the regulatory agencies have only adopted about half of the rules Congress mandated in the Dodd Frank statute. My prediction: In July 2015, about 65% of the required Dodd Frank rulemaking proceedings will have resulted in a final rule but at least 15% will still not have even resulted in a proposed rule.

2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?

Obviously, the big question here is whether the GOP takes control of the Senate. My current guess is that we end up with a 50-50 Senate, with Biden throwing control to the Democracts (and thereby being so busy that he has no chance of beating Hillary for the 2016 Democrat nod). If so, we're looking at high odds of a budgetary train wreck.

3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?

Both of those rules are pet favorites of the left, so I see the SEC's three Democrat members facing enormous political pressure to get them into law by 2016.

I think the SEC has finally figured out that it has to throw a lot of resources into doing cost/benefit analysis of its rules and that it has to stick to the limits of its statutory authority. If I'm right, their new rules should be less vulnerable to challenge. In addition, given that Obama's finally been able to tilt the DC Circuit to the Democrat side (7-4), the odds are much better that any challenge will be decided by a pro-SEC panel.

07/22/2014

"The idea of 'corporations as persons' though, all started because of a headnote mistake in the 1886 case of Santa Clara County v. Pacific Railroad Co, 113, U.S. 394

While it is true that Santa Clara is the first time the Supreme Court reports mention corporate personality, the idea of corporate personhood is much older. Blackstone's Commentaries described corporations as "articial [i.e., artificial] persons" and relied on even earlier sources in doing so. Canon law, for example, likewise treated corporations as persons--fictional to be sure, but still persons.

Mistake # 2:

... other nations don't employ this "fiction", yet they've found ways to cope with these challenges.

Corporate legal personality is well-established in national legal systems outside of the United States. For example, corporate personality is accepted throughout common law systems. Corporate personality dates back to the late nineteenth century in the United Kingdom. In Salomon v. Salomon & Company, the House of Lords established the principle that a company was a separate legal person from its creator and controlling shareholder and was not merely such person's agent. ... Other common law jurisdictions have followed the holding in Salomon in their legislation and judicial precedents.

Recognition of separate corporate personality is not restricted to the common law tradition. European law also recognizes separate corporate personality. ...

Separate personality is also a principal feature of Asian legal systems. Corporations have separate legal personality and resultant rights in the People's Republic of China and the Republic of China. ...

Latin and South American legal systems also recognize corporate personality....

By living in a world of make-believe, courts have extended other rights to corporations beyond those necessary.

Says who? That's opinion, not fact.

Mistake # 3:

Here's what Judge O'Dell-Seneca said last year in the Hallowich v Range case:

Corporations, companies and partnership have no spiritual nature, feelings, intellect, beliefs, thoughts, emotions or sensations because they do not exist in the manner that humankind exists...They cannot be 'let alone' by government because businesses are but grapes, ripe upon the vine of the law, that the people of this Commonwealth raise, tend and prune at their pleasure and need.

Sigh. Once again the concession theory raises its damnably ugly head. The concession theory is commonly traced to Chief Justice Marshall’s opinion in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), which held that “[a] corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.” Id. at 636. Subsequent commentators understood Dartmouth College as establishing “the idea that corporations are created and empowered as a ‘concession’ from the state political authority.” Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, 61 Geo. Wash. L. Rev. 14, 68 (1992). But it has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously. William W. Bratton, Jr., The “Nexus of Contracts” Corporation: A Critical Appraisal, 74 Cornell L. Rev. 407, 433-36 (1989).

Back to Dvorsky for a sleight of hand:

Similarly, solicitor general Elena Kagan has warned against expanding the notion of corporate personhood. In 2009 she said: "Few of us are only our economic interests. We have beliefs. We have convictions. [Corporations] engage the political process in an entirely different way, and this is what makes them so much more damaging."

But we know that what has Dvorsky up in arms is the Hobby Lobby decision, in which the Court recognized a corporation's personhood in order to vindicate the rights of its owners to believe the way they choose rather than as the government tells them. So he's invoking Kagan to justify punishing people for exercising their beliefs, which seems odd at best.

Back to Dvorsky for another oddity:

I asked MacDonald Glenn if the concept of corporate personhood is demeaning or damaging to bona fide persons, particularly women.

"It's about sentience — the ability to feel pleasure and pain," she responded. "Corporate personhood emphasizes profits, property, assets. It should be noted that corporations were given legal status as persons before women were."

You will have guessed where he's going with that move. Right, to say that women should have the right to abort unborn persons (he dismissed fetal personhood as "crazy").

In sum, this is a series of factual misrepresentations, misstatements, sleights of hand, and so on deployed to advance a political cause. And a pretty awful one at that, as it's a political world view that is statist, secularist, and anti-life.

Abstract: This paper examines how post-closing contingent payment (PCP) mechanisms (such as earnouts and purchase price adjustments) can facilitate mergers and acquisitions transactions. By relying on verifiable information that is obtained after closing, PCPs can mitigate the problems of asymmetric information over valuation and, in contrast to the conventional understanding, this benefit applies to both earnouts and purchase price adjustments. When both the acquirer and the target are aware that there is a positive (but uncertain) surplus from the transaction, PCPs function more as an imperfect verification, rather than a signaling, mechanism and a pooling equilibrium is possible, in which all parties adopt a PCP. When the parties are uncertain as to whether a positive surplus exists, on the other hand, PCPs function as a separating device, in which the seller with a positive surplus successfully signals its valuation with a PCP. The paper also addresses the problems of post-closing incentives to maximize (or minimize) the PCP payments. When such a moral hazard is a concern, the paper shows that (1) the PCPs will be structured so as to minimize the deadweight loss and a separating equilibrium is more likely to result; and (2) when the deadweight loss is sufficiently large, the parties will forego using a PCP mechanism altogether.

Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments (June 30, 2014). Virginia Law and Economics Research Paper No. 2014-10. Available at SSRN:http://ssrn.com/abstract=2460777

07/21/2014

One of the semi-annual highlights of the corporate law year is Francis Pileggi's roundup of the most significant Delaware corporate (and commercial) decisions in the prior six months. He's announced that:

Ten decisions with the most far-reaching application and importance during the first half of 2014 will be highlighted and discussed during an audio conference led by an Eckert Seamans’ team of corporate and commercial attorneys. Participants can dial-in on Thursday, July 24, 2014 at 3:00 p.m. EST.

According to the law firm Davis, Polk & Wardell's progress report, Dodd-Frank is severely taxing the regulatory agencies that are supposed to implement it. As of July 18, only 208 of the 398 regulations required by the act have been finalized, and more than 45% of congressional deadlines have been missed.

The effect on the economy has been worse. A 2013 Federal Reserve Bank of Dallas study showed that the GDP recovery from the recession that ended in 2009 has been the slowest on record, 11% below the average for recoveries since 1960. ...

[Dodd Frank-caused regulatory] uncertainties, costs and restrictions have sapped the willingness or ability of the financial industry to take the prudent risks that economic growth requires. With many more regulations still to come, Dodd-Frank is likely to be an economic drag for many years.

I called Dodd Frank "quack corporate governance." It's a conclusion I stand by despite the naysaying of numerous nattering nabobs of negativity.